Bottom Line on Singapore GDP: Curb Your Enthusiasm

Singapore's economy may have grown unexpectedly in the first quarter of the year but the manufacturing sector remains weak and that's not a great sign for the export-dependent economy, analysts say.

Data on Thursday showed the Southeast Asian city state grew 1.8 percent in the first three months of the year compared with the previous quarter.

That was much better than an advanced estimate of the gross domestic product (GDP) data released last month that showed Singapore contracted 1.4 percent in the first quarter or expectations for a contraction of around 1.1 percent. A surge in financial services was cited as reason for the unexpected upward revision.

"Admittedly, quarter one GDP turning from a contraction [flash estimate] to an expansion in the revisions is significant insofar that the chances of a 'technical recession' are reduced," wrote analysts at Mizuho Corporate Bank, referring to two quarters of contracting economic growth which put a country in a technical recession.

"But equally, the big picture has not changed so much that it warrants a celebration. In a nutshell, upward quarter one revisions were almost entirely due to better than expected service sector performance whereas manufacturing fared worse than estimated," they added.

Activity in the manufacturing sector, which accounts for roughly 20 percent of Singapore's GDP, contracted 12.3 percent in the first quarter, the breakdown of Thursday's data showed.

Singapore, like most of its Asian neighbors has been hurt by weak demand for its exports, as Europe's economy remains in recession and regional heavyweight, China, shows signs of sluggish growth.

"If you look at consensus expectation, most people were going for a negative number, so the data was a surprise," Kristy Fong, investment manager at Aberdeen Asset Management told CNBC's "Cash Flow." "But there is [global] slowdown taking place and Singapore is exposed to that."

Asia Vulnerable

Growth data released over the past week highlight that Asia remains vulnerable to weak overseas demand for exports.

Thailand's economy contracted by a bigger-than-expected 2.2 percent in the first quarter from the previous one, while Malaysia's economy grew 4.1 percent in the first quarter from a year earlier – its slowest pace in more than three years.

Barclays analysts said they did not expect the boost from the financial services sector to Singapore's GDP in the first quarter to last.

"We do not think the exceptionally fast pace of growth in financial services activity can be sustained through the year," they said in a note. "The Singapore stock market continued to rise in April and May, buoyed by improved sentiment on the back of fresh monetary stimulus in advanced economies, but the global economic recovery remains fragile and downside risks remain that could dampen sentiment."

Following the release of the GDP data, Singapore's Ministry of Trade and Industry reiterated its forecast of 1 to 3 percent growth this year.

Analysts at Mizuho said the fact that the government did not change its 2013 GDP forecast was another sign that the unexpected first-quarter GDP surprise did not change the overall outlook for the economy or monetary policy.